Basel seeks a stronger boundary between banking & trading books

LONDON: Banks face tougher rules on how they differentiate between assets they keep in their banking and trading books, making it harder to dodge capital rules, under proposals published by the Basel Committee on Banking Supervision on Thursday.

Lenders would have to give regulators evidence of buying and selling of securities in their trading books and face limits on their ability to shift assets between books under the plan. The risk of credit crunches would also need to be taken into account in calculations of how much cash they should keep in reserve against trading losses.

The proposals are "a vital element of the objective to achieve comparability of capital outcomes across banks, particularly those which are most systemically important," the Basel group said.

The group, which brings together banking regulators from 27 nations including the UK, the US and China, agreed in 2010 to more than triple the core capital that financial firms must hold.

Last year, it also targeted 29 lenders including Deutsche Bank AG, BNP Paribas SA and Goldman Sachs Group for capital surcharges of as high as 2.5% of their assets in a bid to rein in lenders deemed too big to fail.

Trading books represent portfolios of securities that banks want to actively trade while banking books contain products that lenders intend to hold to maturity.

The committee noted "large differences in capital requirements against similar types of risk" of losses on securities in the different portfolios, meaning that "the overall capital framework proved susceptible to arbitrage."